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Federal income tax purposes at all relevant times. MMS was in
the business of manufacturing mobile and modular medical
diagnostic facilities. Shortly after its creation, MMS
established a relationship with Huntington National Bank
(Huntington) to obtain financing for its business activities.
Huntington's loans to MMS were initially on a short-term, "per
project" basis; i.e., funds were lent on the basis of the
contracts MMS obtained for the construction of diagnostic
facilities, to be repaid upon the completion of construction when
MMS was paid.
MMS experienced losses from its inception in 1988 through
1994. In February 1992, petitioner obtained four outside
investors in MMS: George F. Rapp, James D. Rapp, John G. Rapp,
and Gary L. Light (the Rapp Group). The Rapp Group made capital
contributions to MMS of $800,000 in the aggregate in exchange for
approximately 15 percent of MMS’s stock. As a condition for the
Rapp Group's investment, MMS was obligated to secure a commitment
for a $1 million line of credit. MMS did so through Huntington,
which extended a $1 million revolving line of credit to MMS on
March 31, 1992 (the MMS/Huntington Loan3).
3 The parties to the MMS/Huntington Loan executed a loan
agreement, security agreement, and promissory note. Except as
otherwise indicated, reference to the MMS/Huntington Loan
encompasses all three of the foregoing documents.
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